ROE

I am considering adding a new product to my firm's existing product line. It will cause a 15 percent increase in my profit margin (i.e., new PM = old PM ´ 1.15), but it will also require a 50 percent increase in total assets (i.e., new TA = old TA ´ 1.5). I expect to finance this asset growth entirely by debt. If the following ratios were computed before the change, what will be the new ROE if the new product is added and sales remain constant?

Solution Preview

I am considering adding a new product to my firm's existing product line. It will cause a 15 percent increase in my profit margin (i.e., new PM = old PM ´ 1.15), but it will also require a 50 percent increase in total assets (i.e., new TA = old TA ´ 1.5). I expect to finance this asset growth entirely by debt. If the following ...